Notesale: Turn your study into money

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FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

THE VALUE OF THE FINANCIAL SYSTEM
1
...
1
...

- Large and sophisticated sub-markets:
- Government bonds (UK = gilts)
- Corporate bond (companies)
- Local authority bonds
- International bonds
Companies often need to borrow money
...
Can sell it to other investors
...
2
...
➔ Important innovation that has allowed
much faster growth in people’s economic well-being
...

- Owners of the company can vote directors in or off the board to try to appoint
them
...
3
...
Allow companies (etc) to issue instruments
that promise to pay a sum of money after, say, 30 days if the buyer ays an amount
now for owning that right
...

- Money markets are wholesale markets because they involve large
transactions each time
...

- Organizations active in this market (lending):
- Banks ➔ beth lenders & borrowers
...


1

A "per annum"
interest rate ➔
the amount of
interest charged
for one year, as a
percentage of the
amount borrowed

FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

- Non-banking financial institutions
- Treasury bills ➔ Large organizations such as companies, Gvts, and banks often
need to borrow money for period of a few days or weeks
...

- The extremely low interest rates throughout the Financial system, including
bank account savings, produced howls of complaint from savers, who
received interest significantly less than inflation
...
4
...

- Spot market ➔ currencies are bought and sold for immediate delivery (1 or 2
days later in reality)
...

- Futures & Options and other FOREX derivatives are employed to hedge
(manage) risk and to speculate
...

- Currency linked to Gold:
- Exchange rate Ancre:
- Global financial center Index

1
...
The derivative and commodity markets

- Future ➔ contract to undertake a transaction at point in days/weeks/years from
now, at a price agreed now
...
If sm is concerned abut price moving to an unprofitable level for
them ➔ they will lock in future price in one of future markets
...

- The right becomes salable derived financial instrument
- An option gives the purchaser the right, but not the obligation to buy or sell
something at some point in the future at a price agreed now
...
6
...

- Banks ➔ safe location + standardized type of securities
...

2
...
1
...
Results published in Global Financial Centers Report
(sponsored by Qatar Financial Center Authority, produced by think-tank Z/Yen
Group)
...

People

- the

-

-

Business environement

The most important factor in
availability judging the competitiveness
of skilled
of financial center
...

Volume and
value of trading
in equities and
bonds as well
as he clustering
effect of having
many firms
involved in the
financial
services sector
together in once
center
...

The cost and
availability of
buildings and
office space
...


The concept that
the whole is
greater than the
sum of its parts
considers overall
competitiveness
levels of cities
and how cities
are perceived as
places to live
...


2
...
Global financial Centers Index

- There is very little difference between London &
NY ➔ these 2 centers work together for mutual
benefit
...

(1) London
(2) NYC

3

INES KIRANE
HULT BBA - Y1 - SEM 2

FIN200
1 - OUTLINE
LECT 1/2
(3)
(4)
(5)
(6)

Hong Kong
Singapore
Tokyo
Shanghai

Criterias: importance of ≠
financial centers
➔ Places for IPO (Initial
public offering) = raise
money from shareholders by issuing share on these stock markets for the first time
...

2
...

4
...

2
...

4
...

2
...

4
...

2
...

4
...
Some feared that this would cause a mass
relocation of financial services providers to other centers
...

- Japan, France and Germany have more activity than the Asian centers in a
number of segments

3
...

- small and portable
- it will have to hold its value over a long period of time
- Have general acceptability
...
Now its credit, debit cards and other
forms of electronic transfer as well as notes and coins
...

- Constant expansion in the fledging financial system gradually turned it into
the complex global colossus it is today
Financial intermediaries ➔ put lender and borrowers in touch with each other for a
« consideration »
...
11 markets
...


Borrowing Return on
or the sale bonds and
of shares shares, etc
...
1
...
These firms are trying
to maximise the wealth generated by their activities
...
plant
The firms,
serve
theirfor
social
to attract funds for use over many years
...

at risk, sometimes very high risk
...
)

5

Conflict of preferences
We have a conflict of preference between the primary investors wanting low-cost liquidity and

15

INES KIRANE
HULT BBA - Y1 - SEM 2

FIN200
1 - OUTLINE
LECT 1/2

3
...
Conflict of preferences

- Conflict of preference ➔ between primary investor wanting low-cost liquidity and
certainty and the ultimate borrowers wanting long-term risk-bearing capital
...
3
...

- by solving the conflict of preferences
- 2 types of financial intermediations:
- Agency / brokerage type operation ➔ rigs together menders and firms
...

Offers securities for sale
↓[funds]
Financial Intermediaries
↓[funds]
Purchase primary securities issued by Firms
Exhibit 1
...
4
...


6

17

- Go-between = someone who matches up a provider of finance with the user of

FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

- Investors wanting to buy shares in a newly floated company
...


3
...
Asset transformers

- Asset transformation ➔ he creation of an intermediate security with
characteristics appealing to the primary investor to attract funds, which are then
made available to the ultimate borrower in a form appropriate to them
...
Risk is retained by
the intermediary and its capital serves as a buffer against losses for its
investors
...
The bank intermediary then uses the
funds attracted by the new financial asset to buy a security issued by
the Firm (primary security) ➔ the Firm obtains long-term debt capital
...

- The bank given its size exploit economies of scale and anticipates
that only a small fraction of its customers will withdraw their money on
any one day
...

- Bank reserve allows liquidity ➔ generally between 8 to 10% of the
amount of money the bank has
...

- Bank runs ➔ Greatest example 2008: US / Greece, can exist and is
very rare
...

- banks
- building societies
- Unit trusts ➔ they gather together hundred of individuals monthly
saving and invest them in a broad range of shares, thereby exploiting
economies in transactions costs
...
13

Savings into investment in an economy with financial intermediaries and financial markets

Savings

Investment

Preferences

Costs

Financial intermediaries
and markets

Projects

Brokers

High
liquidity
Primary
investors
(households)

Low
risk

Reduced agreement costs

Asset
transformers

Ultimate
borrowers
(businesses)

Attract savers by
offering securities
with characteristics
they require

Sell securities
usually with low
liquidity and high
risk, e
...
shares,
bonds

Reduced monitoring costs

Low
liquidity

High
risk

Chapter 1 • The value of the financial system

Small
amounts

Reduced search costs

Large
amounts

Financial
markets
Enhance liquidity
...
6
...

(2) Risk spreading ➔ intermediaries are able to spread funds across a large
number of borrowers and thereby reduce overall risk
...

(3) Transaction costs ➔ they are able to reduce the search, agreement and
monitoring costs that would be incurred by sabers and borrowers in a direct
transactions
...
7
...

- End 20th c / 21st c ➔ the electronic age brought innovation in the field of
payments, so that now cheques are virtually redundant
...
Financial markets

- Financial markets exert enormous influence over modern life
...

- The securities sold into the primary market are generally done so on the
understanding that repayment will not be made for many years
...

- Ability to liquidate (turn into cash) a holding + Reducing research, agreement &
monitoring costs
...
Growth in the financial services sector

- Post war period ➔ significant growth of the financial services sector
...


- Firms in the financial services sector:
- dynamic
- innovative
- adaptable
5
...
Some reasons of the growth of financial services in the UK

- Historically, the most important financial center
- Heart of the British Empire
- Heart of the industrialized world
- London Working hours:
- Morning ➔ can trade with the Asian Market;
- Evening ➔ can trade with the US Market
...

- Larger share of national income devoted to paying sector fees + ever
widening range of financial services
...
Cluster of firms: proximity ➔ learn from each other ➔ more
efficient
- Prerequisites:
- Stable political and trustworthy legal system
- no barriers to the flow of money
- the English language
✴ UK based financial services $88BN& UK based financial and related professional
services $107BN

5
...
[ 40 years of innovation ]

- 1970s ➔ remarkably proactive response by the financial sector to change in the
market environment
...
If
income elasticity of demand
of a commodity is less than
1, it is a necessity good
...


FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

- New financial instruments, techniques or intermediation and markets have
been developed with impressive speed
...

- Efforts made to increase the competitive pressures, particularly for banks
...

- Periods of volatile interest rates and exchange rates
...

- 1982: opening of derivative securities ➔ volume rocketed
...

- Borrowers ➔ seek the cheapest funds
- investors ➔ look all over the globe for the highest returns
- Bond selling and trading became global and currencies were traded 24H/D
- international banking took on an increasingly high profile
- multinational corporations
- multifaceted services across the globe (+ expanding range of financial
instruments)
- borrowing in a foreign currency
- helping managing Cash
- ➔ Org° such as JP Morgan Chase & Barclays ➔ Financial
supermarkets (universal banks, financial services companies)
- Computing and telecommunications systems to cut costs and provide
improved services
...

- ATM = Automated Teller Machines
- EFTPOS = Electronic Funds Transfer at Point of Sale
- 1986: Big Bang ➔ the London Stock Exchanges was deregulated
...

- electronic trading
- end of fixed commission trading
- sanctioning of foreign ownership
- reduce the cost of dealing in shares
- The City ➔ insular and comfortable

10

INES KIRANE
HULT BBA - Y1 - SEM 2

FIN200
1 - OUTLINE
LECT 1/2

- Face serious competition from abroad
- In the recent years:
- Disintermediation ➔ cutting out the middle man
...

- Hedge funds (free from most regulatory control) now account for a high
proportion of financial market trading
...
ever more exotic
derivatives)
Internet services / e-trading
Growth of hedge funds and private
equity funds

6
...

(2)
Issuing Debt

Issuing Equity

(+) no dilution of ownership
(-) interest principle: interest being a
tax-deductible expense
...
➔ dividend are optional

Issuing debt from a business
perspective is more risky because you
have the legal obligation to pay back
...

Private equity funds are
typically limited
partnerships with a fixed
term of 10 years (often
with annual extensions)

FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

7
...

- NIM = New Issue Market ➔ company sells its shares on a regulated
exchange for the first time
...

- Secondary trading ➔ the shareholder, bond holder, etc
...
Secondary markets include the stock markets of
the world
...
≠ Privately held companies ➔
the IPOs did not take place
...
Exchange-traded and OTC markets

- Exchange trading takes on the myriad regulated share markets and other
security exchanges around the world
...

- Exchanges have to fulfill statutory requirements ➔ protect and assure investors
...

- more risky
- little transparency in traded prices
- Trades formats:
- shares
- Come shares called unlisted stocks ➔ trades OTC because the
company is small and unable to meet stock exchange requirements
...

- bonds
- commodities

12

FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

- any other security
- OTC constitutes a major part of the derivatives market

13



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